Anyone who has been in the market over the past year knows just how extreme the day-to-day fluctuations have been. In 56 of the last 252 trading days, the stock market moved more than 2% from the previous day's closing price, either up or down.
If you're a long-term investor, that stat should make you very excited.
Sure, that volatility can be stomach-churning, but it also presents great opportunities for patient investors to profit.
In a report called How to Stop Worrying and Learn to Love Volatility, Lord Abbett senior economist Milton Ezrati showed how market volatility "can actually help build wealth over time, especially for longer-term investors."
According to Ezrati, regularly adding new money in a volatile market allows an investor to purchase more shares at cheaper prices, thus lowering the effective cost basis. Interestingly, Ezrati's findings hold true whether prices are rising or falling.
Or even rising at an incredible clip
Ezrati's findings suggest that even after the recent stock market rally, it's still a great time to start investing or add new money. All that's left to do is find a good place to park your capital.
My Foolish colleague Tim Hanson recently highlighted a few stocks that he felt were outrageously cheap. Now, Tim's a great analyst and a deadeye three-point shooter (we play basketball after work), but I wasn't terribly outraged when I saw how cheap his stocks were.
These stocks are cheap
Even after the recent stock market rally, many good companies still appear attractively priced. Amgen (Nasdaq: AMGN ) , Best Buy (NYSE: BBY ) , and Transocean (NYSE: RIG ) are each about 10% below their 52-week highs. ExxonMobil (NYSE: XOM ) has been clipped by about 15%, while Research In Motion (Nasdaq: RIMM ) is down over 20%.
But there's a reason
I think those are all fine companies, and at today's prices, there's a decent chance they'll go on to post market-beating returns. But there's a reason each of them has fallen, be it decreased consumer spending, declining energy prices, competitive concerns, or general recession-fueled fears.
The key to exploiting market volatility is to find situations in which the share price has fallen, but the company's business fundamentals have remained unchanged (or even improved!). We have a few companies that fit that bill at Motley Fool Hidden Gems, including one candidate that looks ripe for new money now.
Head of the class
The company is American Public Education (Nasdaq: APEI ) , a leader in online post-secondary education. Online education is a crowded, competitive market, but APE wisely focuses on a profitable niche: serving the military and public service communities.
So far, this strategy has paid off handsomely for APE. Revenue has more than tripled over the last three years, and thanks to an asset-light business model, the company has churned out $21.5 million in free cash flow over the last 12 months. But while APE continues to fire on all cylinders, bad press about the financing practices at for-profit education peers like University of Phoenix (owned by Apollo Group (Nasdaq: APOL ) ) has dragged APE’s shares down in sympathy. The stock now trades 28% below its 52-week high.
American Public Education is exactly the type of opportunity we look for at Hidden Gems: It's an underfollowed small cap with a strong balance sheet, significant insider ownership, solid free cash flow, and a great growth opportunity. Better yet, the company's share price has been beaten down, even though its future prospects continue to look bright.
We have quite a few companies that meet these criteria on our radar, and some of them are looking pretty darn cheap. If you'd like to start profiting from the recent market volatility, click here to take a free 30-day trial of the Hidden Gems service. As always, there is no obligation to subscribe.
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This article was first published Feb. 5, 2008. It has been updated.
Rich Greifner has learned to love flaxseed oil, volatility, and the bomb. Rich does not own shares of any company mentioned in this article. The Motley Fool owns shares of Best Buy. Best Buy is a Motley Fool Stock Advisor and an Inside Value selection. Apollo Group is an Inside Value pick. The Fool has a disclosure policy.